Till Reality Do Us Part
In politics, we continue to predict relative calm at home through the end of this year, at the turn of which AKP should realize that its popularity is waning. Facing weakening economic growth as well, it is likely to call early elections by mid-2018 rather than wait until November 2019 -- and risk defeat.
The only threat to economic and market sentiment through the remainder of this year is the clash with Germany, which is likely to culminate in some type of economic sanctions. We hesitate to claim President Erdogan would push matters to the bitter end, but a replay of the Russian Crisis can’t be ruled out.
In matters of lesser importance, Ankara’s decision to buy Russia-made S-400 anti-missile defense systems is a snub at NATO, while its contribution to solving the Qatari Crisis remains nil. In Syria, we expect hostilities between Turkey and Kurds soon after Raqqa is liberated, which might also adversely impact sentiment towards the end of the year.
At home, Erdogan put AKP on alert for elections, though he certainly doesn’t intend to call a snap ballot. Despite the absence of poll data confirming our views, we explain why his party is losing the public opinion, which will force his hand in 2018.
In the econ section, we’ve summarized, in a Q&A format, some of the key issues that were brought up in a series of meetings we held with colleagues and investors in recent weeks. In a nutshell, this year is more or less saved in terms of headline growth -- we are now working with a growth rate of around 4% or even higher, versus 3%-3.5% earlier, with impressive headlines in store for the second and third quarters of the year. This is an entirely unsustainable dynamic however, we continue to think, that cannot last till November 2019.
The budget has deteriorated sharply during the first half, and despite all his good intentions, Finance Minister Mr. Naci Agbal’s overall deficit target of under 2% of GDP looks unrealistic. Prepare for something close to 2.5%, we would say. A higher borrowing requirement combined with pressures to lend to the private sector must keep deposit rates elevated, as the government continues to attack the symptoms rather than the cause. If we turn out right about the growth outlook, the CBRT should also come under pressure to lower rates later this year, as credit growth stalls big time.
On the external side, we expect export momentum to weaken and the core current account balance to deteriorate in the coming months, while financing remains a challenge. This backdrop, combined with the fact that growth is likely to have the priority, should keep pressures on the lira elevated.
Recall that there will be no Weekly Update today, which will resume on September 3rd.
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